6500:680 Supply Chain Logistics Management

Practice Problems: Forecasting

Note: Formulas for developing the model are provided on page 2. Pay particular attention while
developing the model to application of the formulas

1. Develop forecasts for period 11 for the demand data in the table below using:
A. A three period simple moving average and a five period simple moving average.
Develop the required forecasting model such that the same model can be used even if
the number of periods in the moving average is changed (hint: you will need to use
the “offset” function to do this). Compute the MAD, BIAS and MSE with the
smoothing constant for the error terms j as 0.3.

Which one works better – the three period or the five period moving average? Why?
How would you explain that based on the theory of forecasting? (i.e. don’t just
mention that one method does better compared to the other because of a low MAD,
MSE, etc. Discuss the underlying reason(s) behind it).

Open Sheet1 of the template shell (Excel file) Practice Problems for Forecasting.xls
available on Springboard. Model this problem in Excel and answer the question above.
Plot a graph which shows how the demand and forecast varies with time period.

Answer:

B. Exponential smoothing with alpha = 0.3 and alpha = 0.7. Again, compute the MAD,
BIAS and MSE with the smoothing constant for the error terms j as 0.3. Assume
forecast for period 2 = actual demand for period 1.

Again, discuss which value of alpha works better? Why? Again, how would you
explain that based on the theory of forecasting? (i.e. don’t just mention that one
method does better compared to the other because of a low MAD, MSE, etc. Discuss
the underlying reason(s) behind it).

Open Sheet2 of the template shell (Excel file) Practice Problems for Forecasting.xls
available on Springboard. Model this problem in Excel and answer the question above.
Plot a graph which shows how the demand and forecast varies with time period.

Answer:

Actual
Period Sales
1 64
2 84
3 91
4 97
5 115
6 135
7 137
8 144
9 153
10 171

Page 1 of 2
Formulas:

n-period Simple Moving Average (SMA)

• Average the n most recent demands to find the average for the current period:

Dt  Dt 1  Dt  2    Dt  n 1
At 
n

• Use the average for this period as the forecast for next period:

Ft 1  At

Exponential Smoothing (ES):

• Exponential smoothing is like a weighted moving average in which we include all the
historical data.
• At = Dt + (1-)At-1, 0    1
• Ft+1 = At

Measuring Forecast Accuracy:

• Forecast Error: Et = Ft – Dt
• MAD (for the 1st period) = |Et|
• BIAS (for the 1st period) = Et
• MSE (for the 1st period) = (Et)2

For subsequent periods:

• MADt =  × |Et| + (1-) × MADt-1
• BIASt =  × Et + (1-) × BIASt-1
• MSEt =  × (Et)2+ (1-) × MSEt-1